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| Summary of Contents | STOCK UPDATE TVS Motor Company
Recommendation: Buy
Price target: Rs175
Current market price: Rs159 Volume growth to remain strong; margin recovery delayed Key points - TVS Motor Company (TVS) aided by incremental volumes from new launches (Jupiter and Star City+) reported a volume growth of 21.9% and a healthy revenue increase of 31% for Q1FY2015. However, contrary to expectations of a margin expansion on a sequential basis, the OPM contracted by 75BPS to 5.7%. Thus, the net profit growth of 39.4% to Rs72.3 crore was well below expectations.
- The management emphasised on volume growth and market share expansion as the growth drivers for the company in the near term. The company has had two launches in the last six months which will be followed by another three launches in the rest of the current financial year. These new launches will be supported by advertisement and brand promotion campaigns which would limit the margin expansion in the near term.
- Consequently, we have raised the volume estimates for FY2015 and FY2016 but moderated our margin assumptions on factoring in expectations of elevated sales and advertisement spending going forward. Accordingly, the earnings estimates for FY2015 and FY2016 have been cut by 7% and 3.5% respectively. Still we expect the company to deliver healthy earnings CAGR of 26% over FY2014-17. Hence, despite the disappointment of the first quarter, we remain positive on the stock and maintain our 18-month price target of Rs175 (15x FY2017E earnings).
Wipro
Recommendation: Buy
Price target: Rs645
Current market price: Rs577 On road to recovery, maintain Buy with price target of Rs645 Key points - For Q1FY2015 the IT services business of Wipro reported a 1.2% Q-o-Q growth to $1,740 million, which was closer to the mid-level of the guidance range of $1,715-1,755 million. On a constant-currency basis, the revenue growth was at 0.3% QoQ. For Q2FY2015 Wipro has given a decent guidance range of 1.7-4.0% QoQ. The guidance for Q2FY2015 includes the revenue from the recent ATCO deal ($112 million revenues per annum). The IT services business' EBIT margin was down by 170BPS QoQ to 22.8% because of a wage hike (one month) and expenses pertaining to the issue of RSUs. In Q1FY2015 the net income was down by 5.5% QoQ and up by 30% YoY to Rs2,103 crore.
- During the quarter, the company won seven large deals of which one was a strategic alliance with Alberta-based ATCO (which Wipro acquired at $195 million with projected revenues of $112 million annually for the next ten years). Additionally it won three deals in the digital space. It added 35 new clients during the quarter and made net addition of 1,399 employees taking the total to 147,452 employees.
- On the back of strong deal wins and a healthy pipeline, the management appears positive about catching up on growth in the coming quarters and indicated that the second half of the fiscal would be stronger. Though there could be some volatility in the quarterly performance owing to the transition of the large deals, but we are positive about the growth recovery path of Wipro in FY2016 and FY2017. We have broadly maintained our earnings estimates. The stock trades at 16x and 14.3x FY2015 and FY2016 earnings estimates. We retain our Buy rating on the stock with a revised price target of Rs645.
Kewal Kiran Clothing
Recommendation: Hold
Price target: Rs1,800
Current market price: Rs1,732 Rich valuations, downgrade to Hold with a revised price target of Rs1,800 Key points - Weak earnings; net down 16.7% YoY: Kewal Kiran Clothing Ltd (KKCL)'s Q1FY2015 earnings performance was weak despite a 14.5% growth in the net sales. Higher cost of sales (up 617BPS YoY) coupled with high overheads dragged the operating profit down by 8% YoY. A weak operating performance coupled with a lower other income (down 67.8% YoY) resulted in a 16.7% decline in the bottom line for the quarter.
- Management reaffirmed its guidance of 25-30% growth; margin contraction an aberration: The management explained that the margin deteriorated because the first quarter of a fiscal is traditionally weak and fixed overheads were higher during Q1FY2015. It assured that the drastic margin deterioration was an aberration and the same would get corrected in the subsequent quarters. On the demand front, the management remained moderately optimistic and continued its guidance of a 20-25% top line growth (taking its cues from the order bookings by the trade channel) with a sustainable margin of 22-24% for FY2015. Thus, we have largely maintained our FY2015 and FY2016 earnings estimates for the company and expect its bottom line to grow at a CAGR of 17.7% over FY2014-16.
- Good business but stretched valuation makes us downgrade it to Hold with a revised price target of Rs1,800: KKCL led by its product profile and robust brand equity strength is a strong proxy play on the revival in the urban discretionary spending category expected post-H2FY2015. A promising business model coupled with a vigilant management and a lean balance sheet (strong net cash of Rs203 crore; around 9% of the market cap, with a lean working capital cycle) makes us positive on the company. But in the recent past the stock has witnessed a sharp run-up (up 38% in three months since our last update on the company on May 12, 2014) and is currently trading at 23x FY2016E earnings. This leaves a limited upside to the stock price from the current levels. Hence, we downgrade our rating on the stock from Buy to Hold with a revised price target of Rs1,800 (valued at 24x FY3016E earnings). We advise our investors to enter the stock after 8-10% decline in the stock price from the current levels.
Mcleod Russel India
Recommendation: Hold
Price target: Rs322
Current market price: Rs283 Q1 was aberration, Q2 and Q3 to witness recovery Key points - McLeod Russel India Ltd (MRIL)'s Q1FY2015 performance was affected by a significant drop in tea production (down 6.2 million kg YoY) which resulted in a 43% decline in the sales volume and a reported loss of Rs32 crore (due to steady fixed cost elements). With a recovery in the monsoon, the tea production in north India is expected to recover over the July-October 2015 period (when quality tea is produced leading to a higher sales realisation). We, therefore, believe the operating performance will be much better in the coming quarters.
- We expect MRIL's domestic sales volume to be marginally lower (with production expected to be lower by 4-5 million kg) and the sales realisation to be up by about Rs20 per kg at around Rs185 per kg (due to a demand-supply mismatch in the domestic market) in FY2015. With no major increase in the operating cost, the OPM of the stand-alone business is expected to expand by about 200BPS YoY to 18.4%. However, at the consolidated level the OPM is expected to remain lower by 50-60BPS YoY as the sales volume of international business is expected to remain flat and realisations are likely to be marginally lower (down 4-5%).
- MRIL's stand-alone performance in Q1FY2015 can be considered as an aberration and a recovery can be expected in the coming quarters (in view of the improving rainfall in the tea growing areas of Assam and West Bengal). We have revised downwards our earnings estimates for FY2015 and FY2016 by 9% and 5% respectively to factor in the lower than estimated tea production and sales volume. In line with the downward revision in the earnings estimates our price target also stands revised to Rs322. We maintain our Hold recommendation on the stock and will monitor its tea production data in the coming months before changing our rating on it. The stock is currently trading at 11x and 8.8x the FY2015E and FY2016E earnings respectively.
- Key risk: Any significant drop in the tea production in the coming months or a substantial hike in the wage rate in January 2015 would act as a key risk to our earnings estimates.
Ipca Laboratories
Recommendation: Hold
Price target: Rs820
Current market price: Rs728 Price target reduced to Rs820; downgraded to Hold Key points - USFDA issues Form 483 to Ratlam API unit: Ipca Laboratories has got an adverse inspection report by the USFDA (ie Form 483) highlighting non-conformance with its quality standards. Consequently, the company has decided to temporarily stop shipments from this facility which will affect the company's business in the US market. Exports of APIs and formulations to the US market stood near Rs296 crore in FY2014 (9% of total revenues). However, the supplies from this facility to other market will not be affected.
- Resolution could be a prolonged exercise: Though the management hopes to get the matter resolved within four to six months and though product filings in the US market would continue as usual, but the company will not be able to launch any new product in the US market till the USFDA reaffirms its quality standards. Also, it will take a considerable time to regain the market share lost during the period of its absence from the US market.
- Reduce our price target by 11% to Rs820; no need to exit in panic after today's correction: To account for the adverse developments, we expect its earnings to drop by 11.4% and 10.8% in FY2015 and FY2016 respectively, assuming total loss of revenue from the US market in FY2015 and partial regain of market share in FY2016. Accordingly, we reduce our price target to Rs820 (16x FY2016E EPS) and feel one should not exit in panic after the sharp correction today. However, we downgrade our recommendation to Hold as the stock is likely to languish in the near term.
| | Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article. | |
| Regards,
The Sharekhan Research Team |
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